On January 12, 2018, FERC denied authorization to transfer a 1,159 MW coal-fired generation facility (“Pleasants Facility”) owned by Allegheny Energy Supply Company, LLC (“AE Supply”) to its affiliate, Monongahela Power Company (“Mon Power”). After considering the applicable tests for affiliate transfers under the Federal Power Act (“FPA”), FERC determined that the parties’ proposed transaction was not in the public interest because it presented potential concerns of captive ratepayers cross-subsidizing non-regulated entities and because certain solicitation criteria were not met. The denial is without prejudice, so Mon Power and AE Supply may resubmit an application that corrects the shortcomings identified by FERC.

After resource planning documents projected a widening capacity and energy shortfall through 2027, on December 16, 2016, Mon Power issued a request for proposal (“RFP”), seeking to acquire one or more generating facilities amounting to around 1,300 MW of capacity and up to 100 MW of demand response within the Allegheny Power System (“APS”) zone of the PJM Interconnection, L.L.C. (“PJM”). The third-party RFP administrator, Charles River Associates, identified 20 existing generating facilities and eight in-development generating projects. The winning bidder was the Pleasants Facility, owned by AE Supply, which, like Mon Power, is a wholly-owned subsidiary of FirstEnergy Corp. Unlike AE Supply, however, Mon Power is a franchised public utility with captive ratepayers.

Mon Power and AE Supply entered into an asset purchase agreement to transfer the Pleasants Facility, and on March 7, 2017 jointly applied for FERC’s authorization of the transfer under FPA section 203. Numerous parties intervened to file comments and protests.

FPA section 203 requires FERC to approve proposed dispositions, consolidations, acquisitions, or changes in control of jurisdictional assets and certain power plants, but only if FERC determines such a transaction will be consistent with the public interest. Similarly, transactions resulting in the cross-subsidization of a non-utility affiliate will also not be approved unless consistent with the public interest. Finally, because transfers between affiliates raise the risk of potential preferential treatment, FERC will additionally consider whether, under the so-called “Ameren guidelines,” the solicitation process preceding such transactions was transparent, fairly-administered and evaluated, and included precise definitions for the solicited assets.

Intervenors and protestors argued that the proposed transaction would result in an impermissible cross-subsidization of AE Supply by Mon Power’s captive ratepayers. Mon Power responded that such concerns were overstated because its state regulator, the West Virginia Public Service Commission, has authority over the proposed transaction as well and may impose various consumer protection requirements.

In its order, FERC rejected Mon Power’s argument against cross-subsidization concerns. Although a type of “safe harbor” for the Section 203 non-cross-subsidization demonstration includes whether a transaction is subject to state review, FERC agreed with the protestors that Mon Power and AE Supply failed to demonstrate that consumer protections are proposed in the concurrent state proceeding before the West Virginia Public Service Commission.

FERC also concluded that Mon Power’s competitive solicitation failed to meet the Ameren guidelines. In particular, FERC determined that the solicitation was too narrowly defined because the stated objective could have been achieved, and more bids could have been evaluated, by considering power purchase agreements and resources outside PJM’s APS zone. Additionally, FERC found that the RFP did not allow for uniform evaluation of bids in part because the RFP did not disclose the scoring criteria up front and it utilized a net present value test that, as FERC determined, excessively favored existing, older generation resources with low upfront costs but potentially high maintenance costs in subsequent years.

FERC rejected Mon Power’s and AE Supply’s joint application as inconsistent with the public interest, but did so without prejudice so that the parties could resubmit a revised application that addressed the problems that FERC identified. As a result, FERC also rejected as moot a related request from Mon Power to assume a promissory note to secure a lien on AE Supply’s interest in certain pollution control assets at the Pleasants Facility.

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